Plaintiffs Peter Ackerman and Joanne Leedom-Ackerman, husband and wife, bring these actions against the United States of America for refund of (1) income tax (Ackerman I, Civil Action 08-00279); (2) accuracy-related penalties (Ackerman IV, Civil Action 08-01136); and (3) failure-to-pay penalties (Ackerman III, Civil Action 08-00722), all for tax years 1997 through 2003, and all allegedly erroneously assessed under the Internal Revenue Code ("I.R.C."). The United States has moved to dismiss Ackerman I and Ackerman IV, and moved for partial dismissal of Ackerman III. Upon consideration of the motions, the opposition thereto, and the record of these cases, the Court concludes that the United States' motions for dismissal and partial dismissal should be granted.
This case arises largely under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), which changed the way that the Internal Revenue Service ("IRS") audits partnerships. A partnership is not a taxable entity for federal income tax purposes; instead it is treated as a conduit through which income passes to partners who are then responsible for reporting and paying taxes on this income in their individual returns. Prior to TEFRA, when the IRS sought to audit taxes owed from partnership income, it audited individual partners, rather than partnerships. This, however, proved to be unworkable and inefficient. In TEFRA, Congress authorized the IRS to conduct partnership-level audits to determine the proper tax treatment of items related to the partnership (such as deductions or credits). If the audit results in an adjustment (such as if the IRS determines that a certain deduction or credit was improperly claimed), the IRS will subsequently assess all of the individual partners for taxes owed based on the adjustment to that particular item.Under TEFRA as originally enacted, penalties were not considered during the partnership-level audit, but were considered during individual partner assessments. In 1997, Congress passed the Taxpayer Relief Act, which made changes to the TEFRA provisions, most notably for this case authorizing the IRS to consider and assess penalties during the partnership-level audit.
This cases arises from a TEFRA proceeding. In this case, the Ackermans' trust was a partner in a partnership that was audited by the IRS. Following the audit, the IRS determined that the partnership had incorrectly claimed capital losses, and that these losses should be adjusted and penalties should be applied. Thereafter, it issued a notice to the Ackermans setting forth the changes in their tax liability resulting from the adjustment and from the penalties. The Ackermans allege that the IRS made computational errors in applying the adjustment to them and also assert partner-level defenses, such as good faith and reasonable cause, to the penalties, and so filed claims with the IRS disputing their tax liability. Because the IRS has not responded to these claims, the Ackermans filed suit in this Court for refunds due to allegedly erroneously assessed taxes.
Santa Monica Pictures, LLC ("SMP") was formed as a limited liability company (which is treated as a partnership for tax purposes) and subsequently Somerville S Trust, the Ackermans' trust, was admitted as a partner. The IRS audited SMP and issued a final partnership administrative adjustment disallowing certain capital losses claimed by SMP, and assessing a forty percent accuracy-related penalty for gross valuation misstatements. SMP subsequently filed a Petition in Tax Court challenging the adjustments and a trial was held. The Tax Court issued an opinion sustaining the disallowance of losses and the imposition of the accuracy-related penalties. SMP then appealed the Tax Court's decision to the Second Circuit Court of Appeals.
In the meantime, on January 18, 2006, following the Tax Court's decision, the IRS sent the Ackermans a letter and forms stating that the Ackermans' tax returns were adjusted in accordance with the Tax Court decision and setting forth the Ackermans' total liability for tax, penalties, and interest after the adjustment. The total amount due was over $150 million dollars. The letter stated that the IRS had not had time to secure the Ackermans' actual tax returns for several years before sending the letter and forms and that, after it did, it would reconsider its tax assessment and, if it discovered that the Ackermans owed additional tax and/or penalties, send another billing notice.
The Ackermans sent several letters to the IRS following the January 18, 2006 adjustment. On February 21, 2006, they sent a letter challenging the accuracy of the IRS's computational adjustments and requesting that the IRS adjust its computations. On March 28, 2006 and August 16, 2006, they sent supplemental letters with supporting materials and supplemental requests for corrections to the computational adjustments. Beginning in August 2006, the Ackermans also tried to contact the IRS by telephone, over thirty times, but the IRS never responded other than to acknowledge receipt of their letters. During this time, the Ackermans requested and obtained a "freeze" on collection of the adjusted amounts. Nevertheless, the Ackermans made three payments to the IRS on April 26, 2006, October 19, 2006, and October 23, 2006, which together paid the total amount owed according to the January 2006 letter plus failure-to-pay (i.e. late payment) penalties.
Subsequently, on May 3, 2007, SMP and the United States reached an agreement to settle the SMP appeal pending in the Second Circuit Court of Appeals. The agreement cut the SMP's, and thus the Ackermans', tax liability by twenty percent across the board, and on June 29, 2007, the IRS issued the Ackermans a Notice of Adjustment reflecting the adjustment to their tax liability resulting from the settlement agreement. The IRS also issued checks to the Ackermans for the relevant refund amounts.
On September 4, 2007, the Ackermans filed a claim with the IRS for refund of the failure-to-pay penalties, which were applied when the Ackermans did not timely pay their January 2006 tax bill. On October 10, 2007, they filed a claim with the IRS for refund of the accuracy-related penalties, asserting partner-level defenses of reasonable cause and good faith. Because the IRS did not deny these claims or the Ackermans' prior computational adjustment claim within six months of their being filed, the Ackermans were entitled to file suit; they filed the instant suit to recover these taxes and penalties.
The United States moves to dismiss Ackerman I and IV arguing that the Ackermans did not "duly file" their refund claims relating to their requests for computational adjustments (Ackerman I) and their challenge to the accuracy-related penalties (Ackerman IV), and therefore this Court lacks subject matter jurisdiction over these claims. The United States further argues that, with respect to the Ackermans' refund claim relating to their challenge to the failure-to-pay penalties (Ackerman III), this Court lacks jurisdiction for several taxable years because the Ackermans chose to proceed in Tax Court for those years.
The Ackermans argue that while the United States fails to state the federal rule underlying its motion to dismiss, they assume it is a Fed. R. Civ. P. 12(c) motion for judgment on the pleadings because it was filed after the close of the pleadings. Under Rule 12(c), the Ackermans contend, the Court must accept their allegations, as the nonmoving party, and view the facts in the light most favorable to them. The United States rejoins that because the Ackermans invoke federal jurisdiction, they bear the burden of establishing it.The United States further argues that in determining whether it has jurisdiction, the Court is not limited to the pleadings but may review or accept any evidence and may resolve disputed facts.
Because the United States filed an answer before its motion to dismiss, the Court will treat its motion as a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). "A defendant may use a rule 12(c) motion after the close of the pleadings to raise various rule 12(b) defenses regarding procedural defects, in which case courts apply the same standard applicable to the corresponding 12(b) motion." Lenox Hill Hosp. v. Shalala, 131 F. Supp. 2d 136, 140 n. 4 (D.D.C. 2000) (quoting Alexander v. City of Chicago, 994 F.2d 333, 336 (7th Cir. 1993)). Here, the United States argues that this Court lacks subject matter jurisdiction over the Ackermans' claims. Therefore, the Court will analyze the motion under the same standards as it would a 12(b)(1) motion to dismiss for lack of subject matter jurisdiction.
Federal courts are courts of limited jurisdiction and the law presumes that "a cause lies outside this limited jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Because "subject-matter jurisdiction is an 'Art. III as well as a statutory requirement[,] no action of the parties can confer subject-matter jurisdiction upon a federal court.'" Akinseye v. District of Columbia, 339 F.3d 970, 971 (D.C. Cir. 2003) (quoting Ins. Corp. of Ir., Ltd. v. Compagnie des Bauxite de Guinea, 456 U.S. 694, 702 (1982)). On a motion to dismiss for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1), the plaintiff bears the burden of establishing that the court has subject matter jurisdiction. Rasul v. Bush, 215 F. Supp. 2d 55, 61 (D.D.C. 2002) (citing McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 182-83 (1936)), aff'd, Al Odah v. United States, 321 F.3d 1134 (D.C. Cir. 2003). The court must treat the complaint's factual allegations -- including mixed questions of law and fact -- as true, drawing all reasonable inferences in the plaintiff's favor. Macharia v. United States, 334 F.3d 61, 64, 67 (D.C. Cir. 2003). On a 12(b)(1) motion, however, a court may properly go beyond the pleadings and consider facts evidenced in the record without converting the motion into one for summary judgment. See Herbert v. Nat'l Academy of Sciences, 974 F.2d 192, 197 (D.C. Cir. 1992).
B. Ackerman I - Claim for Refund Based on Computational Errors
Ackerman I relates to the Ackermans' claim that the IRS made computational errors in applying the SMP decision to them. The Ackermans claim a refund due to the allegedly erroneous assessment. The critical question in Ackerman I is whether the Ackermans "duly filed" their refund claim with the IRS. If not, this Court lacks subject matter jurisdiction. All parties agree that to "duly file" their refund claim, the Ackermans had to file it according to the requirements of I.R.C. section 6230(c), and so the sole question before the Court is whether they did so.
The United States argues that section 6230(c) required the Ackermans to pay and then file a claim for a refund, both within 60 days of receiving the notice of computational adjustment. Because the Ackermans first filed their refund claims (within the sixty days) and then paid their tax liability (making their first payment within the sixty days, but paying the balance after the sixty days), the United States argues that this Court lacks jurisdiction. The Ackermans dispute that there is any requirement of full payment before filing an administrative claim with the IRS, arguing that the full payment requirement only applies before filing suit in federal court, and not before filing an administrative claim. The Ackermans further argue that the United States should be estopped from moving to dismiss on the basis that the claim was not "duly filed" because the United States never indicated during the administrative process that the Ackermans' claims were deficient.
TEFRA claims are subject to the general jurisdictional requirements of section 7422(a) or the I.R.C., which requires that before proceeding to federal court, a taxpayer must "duly file with the Secretary" a "claim for refund," "according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof." 26 U.S.C. § 7422(a); see Whittington v. United States, 380 F. Supp. 2d 806, 812 (S.D. Tex. 2005). Section 7422 addresses the specific jurisdictional requirements in TEFRA proceedings in section (h), which directs that "[n]o action may be brought for a refund attributable to partnership items . . . except as provided in section 6228(b) or section ...